The importance of digital property in companies today, coupled with the increasing threat of sophisticated hackers, has created a significant investment opportunity in cybersecurity. SentinelOne (S 0.35%) is one of the next-generation security companies using cutting-edge technology to protect customers.
The stock has fallen dramatically from its high, achieved before the market went through quite a tumble in 2022. Shares are clawing back, but the company has evolved since two years ago.
SentinelOne has grown, and investors could be poised for significant returns. Below, I'll explain why SentinelOne is poised to break out in a big way.
1. Growth through innovation
SentinelOne specializes in a type of cybersecurity called endpoint security. An endpoint is a device connected to a network, like a computer or mobile device. Endpoint protection is essential because a malicious threat could compromise a network by infecting a connected device and gaining access.
Antivirus is a traditional security technology, but it's dated because it often can't detect new threats it hasn't seen. SentinelOne is part of a new generation of security companies using artificial intelligence (AI) and machine learning to monitor and hunt for potential threats proactively.
NYSE: S
Key Data Points
Cybersecurity is a complex industry where there are a variety of different products for different types of protection. To grow, SentinelOne has expanded beyond endpoint protection by launching security products for identity, cloud, and data lakes. CEO Tomer Weingarten noted on the company's third-quarter earnings call that sales for cloud and data combined for triple-figure year-over-year growth.
Additionally, SentinelOne had just begun rolling out Purple AI, a generative AI within its products that can interact with users, like a virtual assistant, even for non-experts. Ultimately, what matters is how these improvements translate to growth, though seeing such strong early momentum for these new products is encouraging.
2. Proving its business is sustainable
The stock's biggest problem has been how unprofitable SentinelOne is. The company still isn't profitable today, but the progress shown in recent quarters should give investors hope that it will be in the medium-term future.
SentinelOne's cash losses peaked in early 2023, and operating margins have improved rapidly. Management is pushing for positive free cash flow by the second half of the next fiscal year, approximately three quarters from now. There's roughly $800 million on the balance sheet against zero debt, so investors should have zero concern about SentinelOne staying in business.
S Revenue (TTM) data by YCharts
Ultimately, the goal is positive earnings, which analysts believe will come at the end of the next fiscal year, ending in January 2025. In other words, the narrative about SentinelOne's ability to make money could be very different in a year.
Mapping out future return potential
Since earnings are still a ways out, valuing the stock on its revenue makes more sense. In that light, you can see that SentinelOne trades at a hefty discount to its arch-rival CrowdStrike Holdings, which is profitable:
S PS Ratio (Forward) data by YCharts
SentinelOne can generate great investment returns over the long term if revenue growth remains strong and the market boosts its valuation on the stock as earnings come. Today, consensus analyst estimates call for over 30% revenue growth over the next two years. Suppose SentinelOne grows by 20% annually after that.
Future revenue could look something like this:
| Fiscal Year (Ending) | Revenue (M) | Growth % |
|---|---|---|
| January 2024 | $617 | 46 |
| January 2025 | $815 | 32 |
| January 2026 | $1,007 | 31 |
| January 2027 | $1,208 | 20 |
| January 2028 | $1,450 | 20 |
Source: Chart by author.
Even at a slight discount to CrowdStrike today (I'm using 20 times sales), the resulting market cap would be $29 billion, a 3.7-fold return from today over the next five years. Considering the long-term need for advanced security and SentinelOne's high-end product, I think there is a much longer opportunity here than the next five years.
Of course, these are just numbers, and SentinelOne might grow slower or faster than this, or the market might value the stock differently. But tweaking these numbers looks more like a matter of when SentinelOne becomes a much larger company, not a matter of if.
Barring a collapse in growth, likely from being pushed out of a leadership spot in its industry, SentinelOne looks poised to deliver exceptional investment returns.
